Rating action

Scope Ratings GmbH (Scope) has today affirmed the AAA ratings assigned to the Norwegian mortgage covered bonds (obligasjoner med fortrinnsrett) issued by Totens Sparebank Boligkreditt (TSBB), the fully owned mortgage subsidiary of Totens Sparebank (TSB). All ratings have a Stable Outlook.

Key rating drivers

Solid issuer rating (positive)¹. TSBB’s solid issuer rating (A-/Stable) is aligned with the issuer rating of its ultimate parent, TSB. The rating reflects its strong market position in an economically sound local area of south-east Norway; healthy profitability supported by good cost efficiency and low credit costs; managed reliance on market funding; and solid solvency metrics underpinned by the savings bank business model.

Cover pool support (positive)². Cover pool support is the primary rating driver and adds at least six notches of rating uplift. This is reflected by:

1. Cover Pool Complexity Score (positive). Scope has assigned a Cover Pool Complexity Score of 1. This score reflects the issuer’s management of the interplay between complexity and the transparency provided to investors. This allows for a maximum uplift of three notches on top of the fundamental uplift.
    
2. Over-collateralisation (positive). As of 30 June 2021, available over-collateralisation was 15.8%. This level provides protection against market and credit risks and is well above the unchanged 4.0% minimum that supports the cover pool uplift.
    
3. Sound credit quality (positive). The cover pool comprises well-diversified domestic residential mortgage loans (97.7%) as well as liquid substitute assets (2.3%). The cover assets benefit from a low average loan-to-value ratio of 54.7% and moderate granularity, with the top 10 exposures accounting for 1.9%.
    
4. Market risks (negative). There is no foreign currency or interest rate risk. All bonds are denominated in local currency (NOK) and issued floating rate – matching the profile of the cover assets. However, the programme is exposed to maturity mismatches given that the weighted average life of the loans (disregarding prepayments) is 8.9 years longer than that of the covered bonds. This exposes the programme to potential assets sales under discounts in a stressed environment. The bonds’ soft-bullet maturity profile and available over-collateralisation reduce risks.

Fundamental credit support (positive)³. Fundamental credit support provides the covered bonds with five notches of uplift above the issuer rating. As such, only one additional notch from the cover pool support is needed to raise the covered bonds’ ratings to the highest achievable level.

Rating-change drivers

Scope’s Stable Outlook on the mortgage covered bonds reflects a rating buffer of two notches of potential cover pool support. The ratings may be downgraded upon: i) an issuer rating downgrade by more than two notches; ii) a deterioration in Scope’s view on fundamental support factors relevant to the issuer and Norwegian mortgage covered bonds in general as well as on the interplay between complexity and transparency; and/or iii) an inability of the cover pool to provide additional rating uplift.

Quantitative analysis and assumptions

Scope’s cash flow analysis projected defaults for the mortgage cover pool assuming an inverse Gaussian distribution. Scope derived an effective weighted-average lifetime mean default rate of 6% with a coefficient of variation of 50%.

Scope assumed asset-recovery rates ranging between 99.8% in the base scenario and 70.0% in the stressed scenario for the mortgage loans.

Scope established rating-distance-dependent market value declines in order to determine recovery rates. Assumptions reflect developments in the Norwegian housing market and its unique characteristics. An additional fire-sale discount of 20% was also applied, reflecting the value discount of properties sold under non-standard or distressed conditions. The total stressed security value haircuts for the properties securing the mortgage loans range between 46% and 62.0% (depending on the location of the property). On top of that, Scope applied 2.5% of variable and NOK 70,000 of fixed liquidation costs.

Due to the immaterial share of substitute assets, Scope considered the sub-pool as a single exposure to a financial institution rated A- combined with a typical three-year maturity and a stressed recovery rate of 50%.

Scope used the resulting loss distributions and default timings to project the covered bond programme’s losses and reflect its amortisation structures. The analysis also incorporated the impact of rating-distance-dependent interest rate stresses as well as different prepayment scenarios. Scope tested for low (1%) and high (up to 15%) prepayments to stress the mortgage programme’s sensitivity to unscheduled repayments.

Scope assumed an annual average servicing fee of 10 bps for public sector assets and 25 bps for mortgage loans and a recovery lag of 24 months. The recovery timing for the mortgage loans was based on an analysis of Norwegian enforcement processes, also considering the collateral’s regionality.

The agency calculated the cover pool’s net present value in the event of an asset sale by adding refinancing premiums to the rating-distance and scenario-dependent discount curve. The premiums were 150 bps for mortgage loans and 200 bps for substitute assets.

The program is most sensitive to rising interest rate scenarios in combination with low prepayments. For the mortgage assets, the agency also tested the programme’s sensitivity to compressed asset margins (down by 50%), a 200 bps liquidity premium and front-loaded defaults to reinforce the programme’s break-even overcollateralisation.

Rating driver references
1. Totens Sparebank Boligkreditt – issuer rating 
2. Confidential quarterly cover pool reporting (confidential)
3. Fundamental support assessment Totens Sparebank Boligkreditt 

Stress testing
No stress testing was performed.

Cash flow analysis
The Credit Rating uplifts are based on a cash flow analysis using Scope Ratings’ covered bond model (CobEL version 1.0). CobEL applies Credit Rating distance-dependent stresses to scheduled cash flows in order to simulate the impact of increasing credit and market risks. The model outcome identifies the expected loss for a given level of over-collateralisation.

Methodology
The methodologies used for this Credit Rating and Outlook, (Covered Bond Rating Methodology, 18 May 2021; General Structured Finance Rating Methodology, 14 December 2020), are available on https://www.scoperatings.com/#!methodology/list.
The model used for this Credit Rating and Outlook is (Covered Bonds Expected Loss Model version 1.0) available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting this Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating and Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook is UK-endorsed.
Lead analyst: Mathias Pleissner, Director
Person responsible for approval of the Credit Rating: Benoit Vasseur, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 30 October 2018. The Credit Rating/Outlook was last updated on 16 October 2019.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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